Lord Kaldor on a Trade Deficit

Good Guy Ramanan tells us Lord Kaldor said this about Trade Deficits:

“If (a large trade deficit is) continued long enough it would involve transforming a nation of creative producers into a community of rentiers increasingly living on others, seeking gratification in ever more useless consumption, with all the debilitating effects of the bread and circuses of Imperial Rome”

This is a massively useful idea. Now that I heard this, I think about this all the time. I’d stress the point “creative producers” – making stuff has value outside of creating a meaningful life.

When you have a concentration of creative people making stuff, there are large synchronic effects. You never know what good stuff might happen.  This Exorbitant Privilege isn’t all it’s cracked up to be. There are real costs.

We’ll have more about the trade deficit at some point, but wanted everyone to know the direction we’re heading.

 

 

 

 

Comments

  1. Creativity is only the leading edge of production. What follows is repetition. That’s why automation yields productivity gains, once the creativity has been applied what follows is mostly just fungible labor. If it can be done by a robot, it can be replaced by an import.

    If time is wealth, imports free creative producers from the bonds of repetitive production by providing wealth in the form of time to move on creating and innovating.

    If time is wealth, Kaldor seems to be suggesting that wealth corrupts.

  2. When you say ‘making stuff,’ are you specifically referring to hard goods, or do services count?

    I like this bigger, longer-term picture of the trade deficit, but when we discuss the U.S. case in the future, it will be nice to be specific about what specific goods and services are contributing to our trade deficit and which of these you would deem better to have been made in the US vs what the US did instead. Also, just because the US net imports, doesn’t mean it isn’t very productive at home. Some people get the notion that because the U.S. is a net importer, it’s sorta like on net, we aren’t making anything ourselves. No- we just aren’t sending as much stuff abroad.

    • Cullen Roche says:

      I can’t speak for Mike, but I would argue that services can certainly make a huge difference in our living standards. Facebook appears like a mundane and useless resource but performs an important service. It’s allowed me to keep in touch with people, meet new people, expand my network and improve the way I operate. Certainly in line with the improving efficiency of resources argument! Now, golf and fishing (which I suffer weakness for)….not so much. But I certainly appreciate the guys at the tackle shop and the club house serving beers. :-)

    • Unless people can live on consuming services alone, buying/importing all hard goods from outside will be a form of slow suicide. Imagine you, me and Mike are all the inhabitants of Consumer Republic. You cut my and Mike’s hair, I cook for you and him, he entertains the two of us. Yes, we all have a means to earn a living, and money circulates our economy. But when it comes time to buy our car, our furniture, our daily item necessities, we have to buy it outside from Producer Republic.

      Producer Republic doesn’t need to buy anything from us, they have their own domestic service providers, and they’re pretty self-sufficient when it comes to producing all their hard goods daily necessities. Meanwhile, all they get from us in return for their goods are tokens that enable them to buy our services, all of which they can provide themselves. What happens if they start hoarding their hard goods and stop accepting our tokens?

      This is even more worrisome if Producer Republic prefers to accept someone else’s tokens. How do we get those tokens unless we sell something besides domestic services? And yes, markets for most services have a tendency to be domestic-focused.

      • ….above was in reply to w10

      • But then again, the producer republic can’t forever hoard their hard goods either. At one point, the producer republic “need” to sell their hard goods to consumer republic. What is the point producing of all those hard goods in the first place? The people of producer republic might as well as turn around and become a consumer republic themselves.

        In any case, such argument is a strawman. There are times, that producer republic shall seeks the consumer republic token such as vacations, medicals, conferences and etc. Nowdays, you can not live in isolation not unless you are living on planet Mars!

  3. Truth Squad says:

    Golf and fishing are useful if they improve quality of life too. Anything that makes people live more full, healthier and in the end happier lives is good and that’s what the economy should be about.

    Neither productivity, paper wealth, accumulation of goods or anything should be an end by itself. Now, free-market capitalism is, in theory allowing competition and freedom to develop things that make us happier.

    But the question it’s if its done at the expense of what or whom, what improves happiness for one maybe makes other’s life harder. And this is where market-fundamentalists are wrong. If our society was sane it wouldn’t be over-medicated and so leaning to depressions and stress.

    If we build golf camps at the expense of something else, or we amass wealth while dynamically (through worsening financial & labour conditions) making others poorer, is this sustainable?

    Societies don’t have goals, individuals or groups of individuals do, but a whole modern civilized society does not have ‘goals’, because there is always a friction between what you get, what you could get, and what you would want to get, at the expense of others (time, wealth, whatever). There would not be a fix for a society where greed is infinity for each of its members, so the question is achieving a balance between each individual (or group of) greed.

    Increasing chronic unbalances of trades is a perfect example of how individuals within society are abusing their position to feed their greed, accumulating savings (paper assets, exporters) or consumption (goods, importers) at the expense of others, that if continued can’t be returned. In the end what Lord Kaldor said is happening, everybody trying to live at the expense of others and a dysfunctional society. Maybe this is an economic sign that there truly is a lack of common goals, or at least a lack of agreement on what can and can’t be done (because that’s how a society can set up common goals, framing what can be done or not withing society).

    • Cullen Roche says:

      I disagree with the notion that we don’t have goals. As a collective group of people, we would all like more time. It’s the one universal. I can’t tell you how to spend your time. That’s up to the individual, but we all want more time (at least most of us)….

      • Truth Squad says:

        But that’s not a goal, it’s a desire. Both things are not the same, and it’s not semantics. A goal implies an action and plan to, at least try, to achieve it. A desire it’s just that, an idea or dream but not necessarily with a consequence in the real world.

        If as a collective we had the goal to get more free quality time (because you can have plenty of free time while starving), then we would try to get there. But as other posted has said somewhere else, that’s not how modern societies, nowadays at least, are structured.

        Indeed some of the most “successful people” (I don’t agree with this notion, as is completely a social construct product of the dominant values) used as models are sleeves of their own position and do not have quality free time. Or we have a disconnect between social models and what really people does want? Maybe that’s why people is unsatisfied in modern societies.

        That’s an other interesting question, if the answer is yes, then our current society structure is simply wrong. If so, what is stopping us from changing it, it’s just the dynamics of the system, the machinery, and how you’re ‘forced’ to follow it? I don’t think MMR/T can change that, it’s a cultural problem (but probably partially derived from the economic conditions, and there MMT can partially help).

        • Cullen Roche says:

          I guess we just disagree then. I see no reason why creating more time can’t be a goal. People make goals surrounding time every day. “I will spend more time with the kids”. “I will spend more time working out.” These aren’t just desires. And if we, as a society, can better understand what gives us more time, then we can establish real objectives that will get us there.

  4. Looks like I’ll just be repeating much of the comments…. Apple is a creator, Foxconn allows for the importing. Who is better off? Of course, in general I think the article’s point is an excellent one – we need to mind our trade and make sure we’re still creating and not exporting that too.

    • Cullen Roche says:

      It’s all about balance. The USA appears to be increasingly imbalanced. I know MMT says we should just paper it over, but Godley would roll over in his grave if he heard that.

  5. Fellows, can we all take a break and marvel at Mankiw’s latest blog post?

    http://gregmankiw.blogspot.com/2012/02/mmt.html

    ?!

    • Matt Franko says:

      ?! is right! LOL! cue the chirping crickets soundtrack! omg this is hilarious..
      It looks to me that many in the mainstream just don’t know what to say… this is really amazing, Resp,

    • To be fair, Mankiw might have posted it for the benefit of his students since he was quoted in the story. He could leave his comments on it for the classroom. When the WSJ is running stories like the one linked below, the smart play is to make one’s blog un-interesting. :o)
      http://blogs.wsj.com/washwire/2011/10/20/romney-and-adviser-mankiw-they-dont-always-see-eye-to-eye/)

      One other thing the Post story has this Correction:
      “An earlier version of this article included an incorrect anecdote regarding a Modern Monetary Theory meeting. This version has been updated.”
      Anyone read this early enough to catch what the incorrect anecdote was about?

  6. Deficit spending without bond issuance “euthanises the rentier”. Govt bond issuance serves to sterilize deficit spending and prop up the currency, exacerbating the trade imbalance and financialisation of the economy.

    Lower interest rates would euthanize the rentier, establish a “basic rate of reward” for owners of capital, so that “if adequate demand is adequate, average skill and average good fortune will be enough.” (Keynes 1964, pp. 378, 381)

  7. I wonder what the relationship is between our chronic trade deficit and labor’s falling share of national income. Peter Orszag made an interesting point that ties this back to Lord Kaldor:

    “In Economics 101, students learn that the share of national income received by labor stays roughly constant with the share received by capital. This is the first of “Kaldor’s stylized facts,” articulated half a century ago by the Cambridge economist Nicholas Kaldor.
    Recent experience betrays this lesson. Over the past two decades — and especially since about 2000 — the share of national income that flows into wages and other kinds of worker compensation has been plummeting…
    The difference from 1990 to today — about 5 percentage points or so of private-sector income — amounts to more than $500 billion a year. In other words, if labor’s share hadn’t fallen, labor income would be $500 billion higher this year.”
    http://www.bloomberg.com/news/2011-10-19/kaldor-s-facts-fall-occupy-wall-street-rises-commentary-by-peter-orszag.html

  8. Dan Kervick says:

    I don’t think I understand Kaldor’s claim. For one thing, not everything we import is some luxurious consumption good. Suppose we are producing most of our stuff for ourselves, and exporting only a little of it, but are importing lots of computers and other machinery to make ourselves more productive.

    • “Although he denies saying it, Michael J. Boskin, chairman of President [GHW] Bush’s Council of Economic Advisers, will go down in history as the man who said, “It doesn’t make any difference whether a country makes potato chips or computer chips!”.
      http://www.foreignaffairs.com/articles/50110/lester-c-thurow/microchips-not-potato-chips

      Not really your point, but “importing lots of computers” reminded me of that. Acknowledging that oil is a special case, I don’t really care what we import or export. The critical issue is the demand leakage created when imports exceed exports and the inevitable choice it forces on politicians– do they let the budget deficit rise or the unemployment rate?
      MMTers think, just run up the budget deficit and all will be right in the forest. The trouble is, the deficit hawks are politically strong during a recession and politically unstoppable during a recovery so its a certainty that the pols will choose the unemployment rate to take the hit. The simplest way to avoid this dilemma is keep trade in balance, something we haven’t done since Michael Boskin was in govt 20 years ago.

  9. To do that it helps to have a weaker currency, if the trade deficit is largely due to an over-valued currency that is. A good way to achieve this might be to deficit spend *without issuing bonds*.